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Home » Impact Investing » How many definitions of ethical investing does it take to change the world?

Impact Investing

How many definitions of ethical investing does it take to change the world?

Rebecca O’Connor

Good With Money

55% of investors would like their money to support companies making a positive contribution, according to a survey by Triodos Bank.

There has been tremendous growth in demand from investors who want to do more good than harm. A chunky 55 per cent, would like their money to support companies making a positive contribution, according to a survey by Triodos Bank.

The industry is responding, with a plethora of funds now labelled not just “ethical” – the oldest incarnation of approaches that screens out harmful activities, but also “sustainable”, a catch-all kind of term that can mean anything from investing to avoid the financial risk associated with poor environmental practices (think oil spills and emissions scandals) to only investing in companies that reduce CO2 emissions. Then there’s “impact” or “positive impact”, which has come to be the gold standard (although still open to misuse) and involves investing in companies whose business is finding solutions to environmental or social problems.

How to define ‘socially responsible’

“Socially responsible”, is a bit like positive impact. Triodos’ definition of socially responsible ticks some big boxes: including promoting investment in companies offering sustainable solutions, screening out destructive and exploitative industries, assessing ESG as well as encouraging transparency and public disclosure.

“Responsible” on its own can be a lightweight overlay that is more about avoiding harm than doing good. So “ESG”, which stands for Environmental, Social and Governance, can look a lot like normal investing with a few boxes ticked on reporting standards.

It’s important not to assume that all labels mean the same. Because that assumption suits the fund managers that apply the lightest ethical touches, but undersells those that go all out to make their funds whiter than white.

The casual conflation of definitions also disappoints investors. There is a risk as this niche goes mainstream, that more and more well-meaning people who have chosen a nicely labelled fund in good faith will find it merely excludes some key baddies like tobacco and arms. Worthwhile exclusions, for sure, but hardly enough to stop rampant climate change and certainly not enough to satisfy their need to know they are doing their bit.

Ultimately, if the majority of us end up choosing funds that make green claims but do not live up to them, this whole promising exercise of curbing climate change through changing the direction of global capital flows could ultimately end up fruitless – which would be a massive shame, to put it mildly.

A definition needs to be clear-cut

We need a more disciplined approach to terminology – and also education of investors – from the industry.

But there is some unavoidable overlap between these approaches and for ease of reference, a catch-all term is required from time to time, for journalists with short word counts, for example.

Should the confusion over definitions put you off investing in this way? Absolutely not. There are good, genuinely positive investment options out there, amidst the claims and greenwash.

So how can you tell where your money is going? Good With Money created the Good Egg mark (Triodos has one) to help investors or indeed anyone with a bit of money work out where they can put it to genuinely make a positive difference.

But broadly speaking, if the label is ethical or ESG, you know that the fund might not be making a positive impact, but simply avoiding harm and keeping a closer eye than mainstream passive funds on what companies are up to and how they are reporting.

You can derive a bit more comfort from a sustainability or responsibility label, but there’s still a lot of room to justify some questionable holdings within these categories.

How much do labels explain?

Yet there are some genuinely good funds that use a sustainable label too. Positive impact or Socially Responsible labels tend to be the most active in choosing solutions-focused holdings rather than just neutral “do no harm” companies and these are the ones to look for if you really want a fund to do what it says on the tin.

The industry is working on standardised metrics that will help positive investors through this minefield. But for now, there’s no substitute for your own research. If you are interested in this area, download some fund factsheets and read the quarterly reports. Take a look at the top ten holdings of each fund. Email the fund managers if you see a company in there that doesn’t square with your views. Look for the words “active engagement” – it means a fund challenges the companies it invests in to improve standards. If it’s a “passive” fund, it won’t do this.

It’s your money at the end of the day.

Ultimately, the more we as investors, whether that’s through workplace pensions or junior ISAs, demand the best standards and challenge the industry on what exactly it means with its labels, the better it is going to get at delivering what we want.